Nomura’s Richard Koo has a note out today which contains a novel idea for how the larger European peripherals might be able to assuage their two headed problem of both needing more stimulus and having borrowing rates that make it implausible.
“Solution: allow only residents to buy government bonds
As I have previously proposed, one way to solve this eurozone-specific problem is to prohibit member nations from selling government bonds to investors from other countries. Allowing only residents to hold a nation’s government debt will prevent the investment of Spanish savings, for example, in German government debt. Most of the Spanish savings that have been used to buy other countries’ government debt will therefore return to Spain.
During a balance sheet recession, Spanish government bond yields will then fall just like those of the US, the UK, and Japan, providing support for the necessary fiscal stimulus.
Fiscal stimulus at a time when the private sector is not saving is reckless and irresponsible; fiscal consolidation is necessary at such times. But when private savings are increasing sharply and economic conditions are severe, allowing private savings to flow overseas prevents the government from implementing needed fiscal stimulus. This state of affairs in the eurozone is a tragedy that must be addressed.”